2015 Annual Tax Free Gifting Limits to Non-Citizen Spouses Change – But Many Will Still Fall Into the Trap
Estate and Gift Tax Basics:
Our tax code imposes a substantial tax on all transfers of wealth within the United States. Each U.S. Citizen has access to two or three exceptions to this tax regimen.
First, each citizen has a shield from gift and estate taxes which, starting in 2015, will protect up to $5.43 million dollars from transfer tax. This is an increase from 2014 when only $5.34 million was exempt. This is sometimes called the unified exclusion amount because it can be used in whole or in part against either gift taxes during your lifetime or against estate taxes after your death.
There are also category exclusions which exclude certain types or amounts of gifts from being subject to estate tax. These category gifts neither count against your unified exclusion amount nor are they subject to tax. These category gifts include annual gifts. Each U.S. person may make up to $14,000 in current gifts to any person they want without tax. They can also make gifts of this amount or less to as many people as they want, all without tax. A second category are favored direct gifts for the benefit of a person. Under this category, payments made to pay another’s medical bills or educational expenses are not considered gifts.
The third and, perhaps the most generous category, are transfers to spouses. If the recipient spouse is a U.S. Citizen, the donor/giver spouse may give to them any amount without tax. Unfortunately, this unlimited spousal gift exclusion does not apply if the recipient spouse is not a U.S. Citizen. The spousal gift exclusion for gifts to non-citizens goes up next year to $147,000, up from $145,000 for 2014. Any gifts from a U.S. spouse above that amount will chip away at their unified exclusion amount. After that unified exclusion amount is fully consumed, all additional gifts are taxable and of course a gift tax return is required. With proper planning gifts may be made through a qualified domestic trust and thereby delay when tax is levied until after the non-citizen spouse passes away.
The biggest surprise tax challenge for non-resident non-citizens is often how to pass their U.S. property onto their children without being walloped with taxes – I will talk about that in a future post.